چکیده انگلیسی

Using bilateral foreign direct investment (FDI) data, we find that differences in time zones have a negative and significant effect on the location of FDI. We show that this finding is robust across different specifications, estimation methods and proxies for time zone differences. Time zones also have a negative effect on trade, but this effect is smaller than that on FDI. Finally, the impact of the time zone effect has increased over time, suggesting that it is not likely to vanish with the introduction of new information technologies.

مقدمه انگلیسی

A lot has been written in the literature on geography and economic development about the importance of latitude. Hall and Jones (1999), for example, find a positive correlation between the distance to the equator and output per worker, mediated by the social infrastructure. Gallup et al. (1999) argue that the tropical climate in locations near the equator has an adverse effect on human health, agricultural productivity and consequently on economic growth. Acemoglu et al. (2001) claim that tropical diseases, associated with latitude, affected the kind of settlements and institutions colonizers established in the colonies, and thus had an important impact on their later development path. However, little attention has been paid to the economic effects of longitude.
In this paper, we center our attention on a variable that is closely related to longitude: the difference in time zones between locations. In particular, we estimate the effects of time zone differences on bilateral stocks of foreign direct investment (FDI), using OECD data for 17 OECD source countries and 58 host countries from 1997–1999. We show that longitude–in the form of time zones–imposes important costs between the parties in a transaction. To our knowledge, this paper is the first one to present systematic evidence of the impact of time zone differences on the cost of doing business.
The empirical literature, in particular, the one related to the gravity model of bilateral trade, has used two types of variables to control for transaction costs. On the one hand, geographical characteristics of countries or country pairs, such as distance, adjacency, remoteness, and whether one or the two countries in the pair are landlocked or islands, are used to capture mainly transportation costs. On the other hand, variables related to cultural and historical ties between the countries, such as common language, cultural similarities or past colonial links, are frequently used to account for other transaction costs that may affect the cost of doing business.1 However, none of these variables captures the transaction costs related to the need for frequent interaction in real time between the parties. Distance, in particular, does not capture this effect. If telephone, e-mail and teleconference communication are close substitutes for face-to-face interaction, North–South distance should not be such a large problem. In contrast, differences in time zones can matter even given today's easy and low-cost communications, for the obvious reason that people at night usually prefer to sleep.
An alternative way to communicate in real time is to travel. In this case, again, East–West transaction costs may be more important than North–South ones, since jet lag can affect the effectiveness of business travelers, or require longer trips to adjust to the time difference. Jet lag, in effect, may lead to an exception to the rule that people tend to sleep at night: those severely affected by jet lag in fact tend to sleep during the day!
The transaction costs associated to the difference in time zones should be important in activities that are intensive in information and require a great deal of interaction in real time. For this reason, we think that FDI offers a perfect setting in which to study the effects of time zone differences. Frequent real-time communications should be particularly important between headquarters and their foreign affiliates, as well as between a firm and its prospective foreign partners.2 In this sense, while time zones may also affect bilateral trade, the need for real-time communication is probably smaller among trading partners, so we expect their effects to be relatively more important for FDI.
In a related paper, Kamstra et al. (2000) investigate the effect of daylight saving time changes on equity returns. They find that returns are significantly lower immediately after the weekend the change occurred. If sleeping disorders caused by minor time changes can affect the patterns of judgment, reaction time and problem solving of stock market participants, the jet lag associated to inter-continental travel should also lead to important adverse effects.3Portes and Rey (2005) have addressed the empirical determinants of bilateral equity flows, finding a negative and significant impact of the bilateral distance. Given that transportation costs should have no effect on asset trading, the authors interpret this finding as distance being a proxy for informational costs and asymmetries between local and foreign investors. Once they include proxies for informational aspects like the volume of bilateral telephone call traffic, the estimated elasticity of distance is reduced, but remains highly significant. Interestingly, when they include the number of hours that trading in the host's and source's stock markets overlap–a variable closely related to the bilateral time zone difference used in this paper–it has a significant and positive effect. Loungani et al. (2002) extend Portes and Rey (2005) analysis to the case of bilateral FDI flows. Using the same data source that we use in the present paper, they estimate gravity models for a panel of FDI flows. They find that the coefficient of distance is significantly reduced and turns actually insignificant in some specifications, once they account for the “transactional distance” approximated by the bilateral telephone traffic volume. However, they do not include in their analysis variables that may capture the time zone difference effect.4
The rest of the paper is organized as follows. Section 2 describes the data and discusses our empirical strategy. In Section 3, we present our main results on the estimated effect of time zones differences on the location of FDI. We find that time zones have a negative and economically significant impact on the location of FDI. Furthermore, once we introduce time zones into the analysis, the negative impact of distance on FDI is significantly reduced, by around 50% in our baseline regression. We also present extensive robustness analysis of our results. In Section 4, we present some extensions by analyzing the importance of time zones as a determinant of bilateral trade. As expected, time zones matter also for trade, but their impact is much smaller than that on FDI. In addition, we look at the evolution of the impact of time zones over time, using panel data from the same OECD database, from 1988 to 1999. We find that the impact of time zones increases over time, a result that we attribute to the development of new communications technologies, which have reduced dramatically the cost of North–South distance, but have not reduced the cost of East–West distance to the same extent. Finally, in Section 5, we conclude.

نتیجه گیری انگلیسی

We have examined the effects of time zone differences on the location of FDI around the world. The results show that time zone differences have a negative impact on bilateral FDI. This impact is both statistically significant and economically important. Furthermore, once we control for the time zone effect, the coefficient of the distance is significantly reduced. This indicates that in the case of FDI an important component of distance is the East–West component, since transaction costs in activities that require real-time interaction between a firm's headquarters and its foreign affiliates are increasing in this dimension. Our results are robust to different measures of time zone differences, as well as different estimation procedures.
These results suggest that empirical research on bilateral FDI should account for this effect in order to obtain consistent estimates for their parameters of interest. They may also be helpful to understand the patterns of competition to attract FDI. Specifically, host countries would be more exposed to competition from other countries in proximate time zones and less exposed to competition from potential host countries in more distant time zones, other things equal.
Finally, our results suggest that the problem posed by time zone differences has become more relevant over time, with the introduction and widespread dissemination of new information technologies. This link between technology and the impact of time zones is more than mere speculation. It is a pattern that we observe more and more in everyday life, and is supported by numerous examples: like that of an acquaintance, who works for a business located in Washington, DC, but telecommutes from Buenos Aires; or that of the chief economist for Latin America at the World Bank, who is currently based in Bogotá. These cases would have been unthinkable just 10 years ago; and it would be hard to imagine the World Bank's chief economist for Asia working from Bangkok. Interaction with the staff would be, literally, a nightmare.